Closing Stores

Retailers are Reeling – Here’s What It Means for the Economy (and REITs) by Mike Larson, 513/16

Retailers are reeling — from falling sales, online competition, and slowing consumer spending. And if I’m right, the sector’s pain signifies big trouble for the economy. Ditto for Real Estate Investment Trusts, or REITs.

Start with Gap Stores (GPS). The iconic retailer has more than 3,700 stores around the world, including Gap, Banana Republic, and Old Navy. But it’s experiencing a downward spiral, warning earlier this week that its earnings would miss forecasts. Same-store sales collapsed 7% in the most recent quarter, compared with analyst expectations for a rise of 1.1%.

Debt analysts at Fitch Ratings responded by cutting GPS’ debt rating into junk territory. Stock analysts also slashed their ratings on GPS shares across the board, sending the stock down to a four-year low.

Then on Wednesday, department store chain Macy’s (M) dropped yet another bomb on Wall Street. The struggling chain said it would miss both sales and earnings targets in the current quarter and year. Same-stores sales dropped more than 6%, compared with analyst expectations for a drop of around 3.5%. That sent the stock careening to its lowest level in four years, too.

Other retailers like Fossil Group (FOSL), Kohl’s (KSS), and Nordstrom (JWN) also got dragged down by the selling, as well as their own sales concerns. Don’t forget that Aeropostale (AROPQ)just filed for bankruptcy a few days ago, joining other specialty retailers like Pac-Sun (PSUNQ)and Quiksilver (ZQK) that already did. As a matter of fact, the chart of the diversified SPDR S&P Retail ETF (XRT) looks awfully suspect. It hit a two-and-a-half-month low today, and appears headed back to the panic lows from early 2016.

I’ve been warning about lousy retail sales for months.

The good news for you? This should be no surprise whatsoever, and you shouldn’t own any of these turkeys. That’s because I’ve been warning about lousy retail sales for months here in Money and Markets.

In fact, I said in February that: “The U.S. economy and U.S. consumer aren’t in very good shape … and that the trend is worsening with time. Tighter credit conditions, weaker consumer sentiment, rising costs for non-optional expenses, like healthcare, housing and more, are really starting to bite.

“So it’s not that Amazon (AMZN) is stealing a greater share of the retail pie. It’s that the overall pie is shrinking! If I’m right, it’s going to be another serious negative for the stock market to confront.”

The American growth engine is powered by consumer spending. If spending is weakening, that will put the domestic economy on increasingly shaky ground.

The retail problems should cause trouble for another group of stocks: REITs. Everyone has fallen in love with them because they feature generous dividend yields in today’s low-rate world. But unlike consumer staples or utilities, whose revenue and cash flow are more stable, REITs are much more economically sensitive. After all, they pay their dividends with income that comes in from rents.

What do you think is going to happen as more retailers go broke, close stores, and stop making their lease payments? Traditional malls and strip shopping centers will see vacancy rates rise, cash flow drop, and rental concessions increase. That will only add to the pressure on REITs already coming from the multifamily sector. Conditions in the apartment market are deteriorating fast because of massive oversupply, weakening demand, and slumping rent growth.

Bottom line: Make sure you continue to stay away from retail stocks. And take advantage of Wall Street’s willful blindness on REITs to get out of those overvalued stocks at today’s still-attractive prices. Until next time, Mike Larson

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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{ 7 comments… read them below or add one }

Jim Blair - Friday, May 13, 2016 at 8:00 am

A wise man once said, our entire economy is based on folk buying stuff they don’t need, with money they don’t have….on credit. When that is shaken, and folk realize they don’t really need that new pair of shoes, or their 30K mileage car will last a couple more years,…….we’re toast.

Howard - Friday, May 13, 2016 at 8:28 am

Mike, The central ingredient in all of this is trust. People don’t know who to trust anymore. Washington’s figures don’t add up, the fed is interfering with interest rates, commodity markets don’t make sense and the public aren’t stupid. Who would buy stocks at the top of the market cycle even with negative interest rates. The global reserve banks are doing their best to destroy the value of money. What else can ordinary citizens do who aren’t listened to by Washington but display a lost confidence in the system.

George English - Friday, May 13, 2016 at 8:46 am

Mike, The world’s economies are going into “economic shock” as more income is garnered by the one percent. With the one percent getting 93% of the growth in income since the 2008 Meltdown and the distribution of income and wealth as bad and becoming worse than it was in 1928, consumer demand is downsizing to necessities first as discretionary incomes decline. But, it is Marxian heresy to suggest that the taboo R-word (Redistribution) is the only remedy now that another dollop of debt can no longer dig the hole of looming defaults deeper because most participants in the economy are already mired neck deep in the sludge of debt service at the bottom.

Bill Davis - Friday, May 13, 2016 at 8:53 am

First is the demographic shift as Boomers shift into retirement, with fixed incomes and lower need for new anything–clothes, appliances, cars, homes, etc. Second, is the cleanup of excess capacity built in the Oughts (or Aughts–2000-2009) that accompanied the housing boom. The maxim “retail follows residential” that I first learned from George Christie, a McGraw-Hill Construction economist, cuts both ways. When the housing boom went bust, it took away the coinciding retail opportunity. We are still working our way through the excess housing inventory, so it makes sense that the retailers would be having to make hard choices.

Add to that the increase in on-line sales and the still-declining purchasing power of the American consumer and inflation (check your cable bill, health insurance premiums and rent) and there is no mystery in vanishing retail sales.

Victor - Friday, May 13, 2016 at 9:10 am

Some time ago the American politicians divided America into economic sectors in the spirit of China’s Great Leap Forwards and the Soviet Unions incessant Five Year Plans. The results are the same. It had more to do with politics than economics. There is a saying that “retail follows roofs”. To that end politicians have annexed growth areas into cities and combined city-county governments with federal taxpayer money. The infamous urban sprawl. Each political class wants to make money from this process the same as their predecessors. The only way that can happen is to displace the previous citizens. It’s a cycle that is too expensive to continue forever regardless of government gimmicks. The internet that was forgiven sales tax to kick start e-commerce oddly enough reduces impulse sales, and tax revenue, from the brick-and-mortar stores and their suppliers. That’s an example of political business tinkering.

F151- Friday, May 13, 2016 at 9:21 am

Social mood sets the table for the stock market. And when it goes negative as it now is….trouble is brewing. How do you know it is negative? Look at the 2 outsiders chosen by large numbers the electorate in primaries. The 3rd person, Hillary, is only in this race due to her advantage from a sham system.

Socrates Friday, May 13, 2016 at 9:45 am

General Dissatisfaction with US Government is reaching all levels of the Economy finally voters realized that Politicians of both parties are corrupt, incompetent and will no longer
support “the establishment” the unexpected raise of Sanders and Trump is not a “signal” is “reality”. Despite the Corporate News Media smearing the “outsiders” an “outsider” will win the Presidency, this time is a game changer Americans want a Change and they will get it !

http://www.moneyandmarkets.com/?p=78165??ccode=05132016MAM3507&sc=p446&ec=MAM3507?utm_source=MAM&utm_medium=email&utm_campaign=MAM3507%3E

Comments

Demand is down for discretionary spending because personal income is static and prices are increasing for necessities. Consumers are tightening their belts.

Norb Leahy, Dunwoody GA Tea Party Leader